How Our “Mixed Economy” Created These Mixed-Up Markets

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
how-mixed-united-states-economy-created-mixed-up-markets

Over the years, I have often waxed enthusiastic about the transcendent power of capitalism.

The free enterprise system has vastly improved our quality of life and raised our standard of living.

Entrepreneurs and business owners have given us safer transportation, faster communications, miracle drugs and medical devices, more powerful computers, and millions of new products and services that are better, cheaper and longer lasting.

This has benefited the wealth creators too, of course. Most rich Americans achieved their affluence not by inheritance or celebrity status but by starting and managing a profitable business.

Most of us don’t have the time, the investment capital or the experience necessary to found and run a successful company, but we can still own a piece of one through the quintessence of capitalism: the stock market.

With even a modest amount of money, you can accumulate a stake in many of the world’s greatest firms. True, the market has hair-raising ups and downs - as we have been reminded over the last few weeks - but the system works.

In my view, however, there is something different about this sell-off, a lurking fear that something is amiss with our free market system.

It starts with the fact that we really don’t have one. What we have is a mixed economy, one that features characteristics of both capitalism and socialism.

And the latter is hurting us.

“... there is something different about this sell-off, a lurking fear that something is amiss with our free market system.  “It starts with the fact that we really don’t have one. What we have is a mixed economy, one that features characteristics of both capitalism and socialism.  “And the latter is hurting us.”Don’t lay all the blame on President Obama. In the 50 years between 1960 and 2010, entitlements exploded from 28% of federal spending to 66%. And the growth was 8% higher during Republican administrations than Democratic ones.

In particular, George W. Bush’s “compassionate conservatism” looked a lot like old-fashioned liberalism. Or, as one wag put it, Bush came into office as a social conservative and left as a conservative socialist.

His successor saw his reckless and irresponsible spending and topped it. When Obama came into office on January 20, 2009, the national debt was $7.4 trillion. Today it is $18.4 trillion. That debt increase equals more than $65,000 per household.

Yet Obama insists the “mindless austerity” of the sequester - which has brought down the size of the annual deficit the past few years - is hurting us.

These numbers don’t include our unfunded liabilities for Social Security, Medicare and Medicaid, which come to another $97.4 trillion - or $820,000 per taxpayer.

And here’s the bad news for those who sincerely wish we could make up the difference by raising taxes on “the rich.”

If the IRS confiscated the gross income of every corporation in the United States and the adjusted gross income of every American making over $66,000 per year, it would raise approximately $6.7 trillion. But that wouldn’t be enough to meet even the $8 trillion a year growth in these unfunded liabilities.

Most Americans could not seem to care less. Who is drawing the biggest and most enthusiastic crowds this political season? Bernie Sanders, a self-described socialist who proposes increasing Social Security benefits.

Hey, why not?

Democracies from Tokyo to London to Washington, D.C. all face the same intractable problem: elected representatives who are making promises they can’t keep and refusing to say “no” to runaway spending or the special interests who demand it.

Promising to cut benefits - especially for retirees and those nearing retirement - is seen as political suicide. Obama ignored the recommendations of his own bipartisan panel on entitlement reform. And so-called fiscal conservatives running for the nation’s highest office have offered up nothing substantial of their own.

Making matters worse, a report by The States Project - a joint venture between Harvard’s Institute of Politics and the University of Pennsylvania’s Fels Institute of Government - estimates that state and local governments owe yet another $7.3 trillion.  (Amazingly, taxpayers never approved the vast majority of this debt and most remain generally unaware of the extent of their obligations.)

In short, we are hurtling toward the most predictable financial crises in our nation’s history, one that can’t be solved with tax increases, modest reforms or stronger economic growth.

Most Americans realize that we have a budget deficit and a looming shortfall for entitlements. But what they don’t fully understand is the extent of the problem and the enormous threat it poses.

Yet the stock market has gotten a whiff of it lately.

We are now in a period of “administrative markets” where stock returns are affected as much by government policies as they are by economic growth and corporate profits.

In the last few years we’ve seen bailouts, fiscal stimulus, quantitative easing, zero interest rates, heavy-handed regulation, and sharply higher taxes on income, dividends and capital gains. Our corporate tax rate is the highest in the developed world.

This is distorting markets... and lately equity investors have been paying the price.

Given these difficult and unprecedented circumstances, what should you do with your portfolio now?

That’s precisely what I’ll cover in my next column. Stay tuned.

Good investing,

Alex

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Snatch Up This 159-Year-Old Company While It’s on Sale

Considering all the turbulence abroad, it may seem counterintuitive to invest in foreign markets right now. However, just as downtrodden U.S. markets present buying opportunities, so do those in Europe. That’s why today’s pick is Credit Suisse (NYSE: CS).

Founded in 1856 and based in Zurich, Credit Suisse is one of the world’s leading banks. From more than 530 offices in over 150 nations, it serves corporate clients, institutions, governments and high net worth individuals worldwide.

Alex Green added Credit Suisse to The Oxford Communiqué earlier this year. In the time since, investors have had the opportunity to score a more than 10% gain (factoring in dividends). And now that global volatility has pulled shares back a bit, it’s the perfect time to pounce on this longstanding firm.

Here’s what Alex had to say in his initial recommendation:

“Companies want to replace higher yielding debt with lower yielding instruments. Money is so cheap that Apple - a company sitting on more than $25 billion in cash - recently completed a $12 billion bond issue in euros. (When money is this cheap, you take advantage of it.)

“Rock-bottom interest rates also mean that banks are paying depositors virtually nothing. That creates an awfully low-cost asset base to lend against. With such a favorable environment, you might imagine that business at Credit Suisse is good. And indeed it is...

“Credit Suisse is denominated in Swiss francs, of course. And while I remain bullish on the outlook for the dollar, this stock provides a currency hedge. Even if the Swiss franc declines somewhat against the greenback, share price appreciation should easily outstrip any downward move in the franc.”

- Alexander Moschina with Alexander Green

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